That's why "a predictable legal environment makes for a better underwriting environment," says Peter Lefkin, the senior vice president of government and external affairs for Allianz of America, a property and casualty insurer.

The three main proposals making their way through Congress try to limit payouts for asbestos and medical malpractice cases. They also seek to move some class-action cases from state to federal courts.

Senate class action reform legislation could require suits that involve plaintiffs from several states -- or claims of greater than $5 million -- to be heard in federal court. That would prevent "venue shopping," in which lawyers file suits in plaintiff-friendly jurisdictions.

Some medical malpractice reform legislation would cap damages for pain and suffering at $250,000 (or twice the value of medical costs and lost wages). Twenty-seven states already have limited medical liability awards, according to Deutsche Bank.

"There is strong bipartisan support for class action reform. I think there is a good chance it will pass next year," says Sherman "Tiger" Joyce, the president of the American Tort Reform Association.

But he concedes that more work needs to be done on asbestos-reform bills and that passage of medical-malpractice reform could prove difficult through next year, too.

The tort system currently costs the insurance industry $87 billion, according to Tillinghast-Towers Perrin.

"Both President Bush and Democratic presidential nominee John Kerry recognized that there is a clear problem around the country with medical malpractice suits," Joyce says. "At least 20 states are in a health care crisis because of it."

Right now, an insurer could be on the hook for up to 100% of a civil award, says Scott Talbott, the vice president of government affairs for the Financial Services Roundtable.

Tort reform also could help reinsurers like
PartnerRe,
which provide insurance for insurers.

Talbott is convinced that tort reform could get through next year.

"President Bush has made this one of his priorities. He is aware that legal costs and abuses of the court systems have helped to place a wet blanket on the economy," he says.

Karaoglan of Deutsche Bank says that the legislation should eventually benefit customers because insurers theoretically won't need to charge premiums that factor in potentially high settlements.

And without the threat of big jury-award payouts, insurers' price-to-earnings multiples could more accurately reflect the companies' values.

"If tort reform happens, it gets you P/E multiple expansion quicker," says Karaoglan (although he says he can't quantify how much insurance stocks could benefit, since the content of the legislation remains up in the air).

Stocks of insurers change hands at an average of about 12.5x projected earnings for the next four quarters. That's a discount to the S&P Financials index, which fetches 13.2x forward earnings.

Karaoglan believes that the average price-to-book ratio of the industry can trend higher, too.

Currently, the S&P Insurance Property & Casualty index goes for 1.6x book value. That's a discount to the S&P Financials index, which trades at 2.2x book.

Not surprisingly, plaintiffs' attorneys oppose such reform.

"The government is looking to take away Americans' legal rights," proclaims Carlton Carl, the director of media relations for the Association of Trial Lawyers of America.

"They are looking to make a big 'one size fits all' cap even if a jury should decide otherwise," says Carl.

Of course, tort reform may not mean significantly lower premiums for insurance customers.

And the slight Republican majority may not be wide enough to enact sweeping tort-reform legislation.

Skilled lobbying groups, like the trial lawyers, have many Democratic friends in the U.S. Senate, and they could help block legislation or water it down.

That would disappoint investors and perhaps hold back insurance companies' share prices, at least in the short run.

But that seems unlikely. As President Bush's second term begins, the momentum for tort reform is strong. That should help insurance companies --and investors in their stocks -- benefit from the trend as well.

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